Financial Markets Monitor Treasury’s Cash Balance Ahead of Debt-Ceiling Negotiations
As the federal government plans to borrow $1.3 trillion over the next six months, financial markets are closely watching the Treasury’s end-of-December cash balance in anticipation of upcoming debt-ceiling negotiations. The Treasury Department’s latest Marketable Borrowing Estimates, published on July 29, reveal that the Treasury expects to borrow $740 billion in privately held net marketable debt during the July-September quarter of fiscal year 2024. This is $106 billion lower than the previous estimate made in April 2024. The decrease is mainly attributed to the Federal Reserve slowing its redemptions of Treasury securities and a higher beginning-of-quarter cash balance.
The Federal Reserve’s decision to slow the pace of its balance sheet drawdown, announced in May, aimed to prevent volatility in the financial markets. Starting June 1, the Fed reduced the limit on Treasury securities that are allowed to mature and not be replaced to $25 billion. This move has a direct impact on the Treasury’s cash balance, which is projected to be $850 billion by the end of September.
Looking ahead to the October-December quarter of fiscal year 2025, the Treasury forecasts borrowing $565 billion, assuming an end-of-quarter cash balance of $700 billion. These projections are crucial as Washington potentially embarks upon another round of debt-ceiling negotiations, with the federal debt limit set to be reinstated on January 2, 2025.
Quarterly Refunding Estimates and Debate Over Short-Term Debt Issuance
On July 31, the Treasury will release its Quarterly Refunding estimates, outlining its near-term debt issuance schemes. Over the past 12 months, Washington has flooded the financial markets with over $2 trillion worth of short-term debt securities. This surge in sales of T-bills, which mature from 30 days to one year, is part of the current administration’s strategy to manage higher interest payments and growing budget deficits. The Bank of America predicts that short-term bonds will account for 40 percent of net Treasury issuance over the next year.
Analysts at the bank may have based their projections on the conclusion of the Treasury Borrowing Advisory Committee, which expressed “continued comfort” with the bill share of total marketable debt outstanding temporarily exceeding its recommended range. This is due to robust demand for bills and the Treasury’s regular and predictable approach. Some economists argue that the federal government’s extensive issuance of short-term debt may be a form of “activist Treasury issuance” (ATI) aimed at managing financial conditions and the broader U.S. economy. According to Nouriel Roubini and Stephen Miran of Hudson Bay Capital, ATI works similarly to the Federal Reserve’s quantitative easing program, reducing 10-year yields by approximately a quarter of a percent over the past year.
Treasury Secretary Janet Yellen, however, dismissed claims that demand for long-term U.S. government debt is shrinking or that policymakers are waiting for the Federal Reserve to cut interest rates before issuing bonds with longer maturities. Yellen stated during a Senate Appropriations Committee hearing on June 4 that the Treasury does not time the market.
National Debt Reaches $35 Trillion Milestone
On July 26, the Treasury’s Debt to the Penny data confirmed that the national debt surpassed the $35 trillion mark. This milestone was reached less than seven months after reaching $34 trillion. Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, describes this as “sobering” and “unsurprising.” She emphasizes the need to address the debt, stating, “We are going to have to get serious about the debt, and soon.”
The Congressional Budget Office (CBO) recently adjusted its deficit forecast for the current fiscal year, projecting a deficit of $1.9 trillion, up from the previous forecast of $1.5 trillion. In its 2024-2034 budget and economic outlook update, the CBO expects the annual shortfall to reach nearly $3 trillion in the next ten years. By 2035, the national debt is anticipated to exceed $50 trillion.
As the Treasury’s borrowing plans and cash balance continue to be monitored by financial markets, the nation faces the challenge of managing its debt while addressing the potential consequences of debt-ceiling negotiations and economic uncertainties.
